Rashesh is ok kind of chap. Reputations matter in this business. At least I hear reasonable commentary about de-growth of RE loans from current 33% of total book. These people are not just talking but making giant international deals all the while.
Discl: Adding since past week, a best and respected college friend works here.
Credit Funds are the way forward for NBFCs and Edelweiss has shown the way (other big players are IFL & Kotak)
On a ~7,000 Cr. (USD 1 Bn) fund size they would be making an income of ~2% as fund management fees which with a PAT Margin of 25% is ~Rs.30 to Rs.40 Cr. p.a. to the bottom line with hardly any less stress on its own balance sheet (other than its own fund which they would be investing roughly 30% of the fund size or ~Rs.2,000 Cr.)
In mature markets credit funds do what NBFCs were doing in India and I feel this is the trend going forward.
They had indicated 0.5% of operating profit out of 2% fund management charge. This excludes carry profit and performance fee which will be accounted only when they exit and redeem the fund. I think they can easily make 1-1.5% final profit/year on an average. Thatâs why lots of Edelâs profit in AIFs will be largely backended. In one of the calls they had mentioned that they would start exiting some of these funds from FY21 end onwards. As per Rashesh Shah these are âsignificant profits given their sizeâ. I think one of the most profitable distressed fund is up for redemption in FY21. Some folks suggest they have more than 1k cr of carry profit in their own ARC.
These are LUMPY profits and what market likes is consistency and sustainability of earnings ⌠LUMPY profits tags a business as cyclical where one makes handsome profit in some year and suppressed on other times.
Having said this; Edel right now is under stress and earning is de-growing and expected to be this way for sometime and market chases UPCOMING growth âŚ
No BIG institution can buy knowing that earning is expected to degrow and NPA cycle is yet to peak out would park money to SAVE the opportunity cost.
If EDEL manages to tide over this NPA and gain liquidity confidence in the meantime from BANKS / BOND markets then cycle will turn.
Edel is highly UNDERVALUED as per its potential but still DISCOVERING the right price tag for the screw up they did to asset quality and unable to carve a niche for itself to get funded amply from local banks and MFs.
ECLâs (subsidiary to Edelweiss) bond yield have spiked to 18-19% in previous week suggesting something wrong with NBFC and similiar issues are being depicted in share price company which is trading down almost 80% in just 20months. Every Edelweiss investor should keep close watch on ECLâs Bond yields in coming days
Can you please share the link ? Which bonds of Edelweiss are these ?
https://www.edelweiss.in/quotes/ncd/ecl-finance-ltd~eclfinance-n3
As per this data it is a mixed bag. Few are trading at high yields and few at very low yields. Was not able to find any correlation with maturities as well. Both far and short maturity bonds are showing the variance.
This is rough work, will have to go through a weighted average yield to understand how the bond market is pricing edelweissâ payback abilities.
Donât look at the stated yield. Calculate it yourself. Actually I will save you the trouble. Itâs around 18% on most days, for most of the series. Ballpark.
It is nicely priced by Mr Market but shock could come from Indiabulls, Yes bank as per the frauds calendar 
Found this article from Prof Bakshi related to bond yield and stock price interesting. I am attaching it for the benefit of people who are not well versed with the relation between bond yield and stock price.
From the article, IMHO, very high quality of reasoning and facts from the Prof:
SEBI order says:
" CRAs may treat sharp deviations in bond spreads of debt instruments vis-Ă -vis relevant benchmark yield as a material event "
" Does any other regulator make such a demand? It doesnât matter. Why canât India take the lead on this? It is a sound idea. And we have a crisis on our hands, and therein lies an opportunity. We donât have to wait for other regulators to do this before we do it. We can take the lead. "
" Can the stock market be wrong? Of course. The stock market will either be right or wrong in its judgement. My key point is that the bond analyst cannot be in a position to ignore the stock price crash. "
So we have a wider net of info, bond and stock analysts sharing info. This looks like Chandrayaan rocket science here.
Source: https://morningstar.in/posts/53243/bond-analysts-must-keep-eye-stock-market.aspx
Here is media coverage on ECL downgrade
It is a really nice website, just look at the YTM (yield to maturity) in top right hand corner.
Yes, I found a wild variance too.
What I find missing is the issue size to average out the yield of course.
There is no pattern. Long term bonds (maturity 2029) are trading at 11.43 yield considered their 10.5% coupon at issue, mild discount, but poor volume. Some short term bonds of march 2020 expiry trading at 29% YTM (maximum yield of all ECL bonds) and other at April 2020 are trading at 13% YTM with poor volumes considered to issue size. So, nothing remarkable as a warning sign at least for now across maturities given poor volume. I appreciate that someone highlighted to track ECL bonds
17% or so in long term NCDs is usually available. An interesting option for someone bullish on the business. Instead of buying equity, one can shift some portion of oneâs debt portfolio to Edelweiss NCDs. Or simply buy NCDs instead of equity, if one is happy with 17%.
One can also check the bond trading data current/historical here:-
https://www.bseindia.com/stock-share-price/debt-other/scripcode/935088/935088/
Be sure to read the prospectus of the series you are interested in and value the bond before purchasing. Liquidity is low in most series with some days seeing no activity.
Like Kunal said, this is an option for those who donât want to take equity risk in Edelweiss. Bond holders being higher in hierarchy in the balance sheet, this one is safer option but returns will be limited as well.
These are not definite signs of distress as such. Many fixed income funds are facing huge redemption and liquidity for shorter term maturities is an issue. Also, retail/HNI buyers are buidling some worst kind of scenarios given what happened to bonds of ADAG/DHFL. I think bigger institutions would have taken CDS to protect the downside, had we been in the developed world. We have a long way to go for a vibrant and liquid bond market. I think Prof. Bakshi is theoretically right only when the markets are not dislocated like we have it currently. We need independent equity and an independent bond market. If both start showing big correlation, we will have another set of problems. IMO, equity market could decline for various reasons but bond market provides stability as this is mostly traded by well informed institutions.
Adding an interesting link which reflects my thought as well
Correct, markets are dislocated and Bond markets appear generally more trustworthy than auditors and rating agencies etc. I would just add that there is nothing to be gained from intellect here. L&T Fin market movements are an exact copy of Edelweiss, for the entire past year at least. Just the usual Mr Market.
Few thoughts;
⢠Edelweiss along with JM financial and IIFL are the pseudo investment banks of India, they all started as M&A advisors and then branched out into broking, asset management and virtually any profitable financial services activity.
⢠Edelweiss in particular has been more opportunistic and a bigger risk taker than others. For instance, in fy 11 when the commodity boom was at its peak they started nibbling in agri commodities and gold trading, even setting up a gold refinery! Their fy 13 and fy 14 annual reports are full of commodity trading plans. Unfortunately, they on-boarded the commodity train at the fag end of the boom and had to sell the business in 2016.
⢠In fact, from fy 12- fy 15 the company had only pedestrian growth as they continued incubating new businesses, its profits in fy 2014 were less than in fy 08 showing how cyclical the business is.
⢠The market had mostly ignored these broker/investment banks till early 2016 (they were trading at around 2010 valuations at that point). However, something had changed which caused a huge bull run from feb 2016 to early 2018 in Edelweiss and other brokers. What was this?
⢠It was plain old lending done in a very aggressive fashion. Edelweiss with no prior experience in lending or credit analysis grew its lending book furiously from 8600cr in fy 14 to 43500cr in fy 19, of course since profits in the lending business are front loaded they sent the stock soaring as they did for all NBFCs.
⢠Important to recognise at this stage that despite the hype there was nothing unique (other than a smooth talking CEO) about Edelweiss, its so called diversified business model did not receive any attention from the market till they started lending aggressively so its stock price boom from around 50rs to 300rs was complete exuberance and nothing else. Using these exalted valuations as an anchor would be a mistake.
⢠Being opportunistic and taking calculated risks is part of financial services business. As long as the risks donât sink you, you can come back and fight another day as Goldman did but Lehman couldnât.
⢠Edelweiss now has around 9.8kcr in equity, 50kcr in loans and 41kcr in borrowings. Given the aggressiveness of their growth it is right for the market to suspect all sorts dodgy loans, just 10% write offs will wipe out half the equity.
⢠Edelweiss claims their LGD will be low given high collateral value, this may be true but hard to prove till defaults start occurring, Ashiana housing in its latest call said that land values have dropped around 30-50% in NCR area, a startling drop! Parekh too has spoken about aggressive collateral valuations used by NBFCs. While this may not be the case for all regions or all NBFCs, the collateral valuations have started to come under the scanner.
⢠Net net, the market may well be assuming the worst case as it often does during such episodes. The ending may turn out much better. The fundamental question though for investors who are looking to buy now (excluding trading buys) is what is really attractive about this business model from a long-term perspective?
⢠The NBFC growth model is dead, Rashesh Shah has himself admitted that the business model will continue in a much more conservative form. The broking business is a melting ice cube. Asset management/wealth management is good but Edel is subscale and due to be demerged, IIFL wealth is a better bet. The insurance business is loss making and sub scale, plenty of other options in this sector. The ARC business is hugely overrated and most simply donât understand it, this business requires a high-quality resolution process and strong courts, something India doesnât have, only in the US has the distressed asset business been successful.
Edelweiss is started itâs lending business from FY09 not in FY14 with Developer financing and slowly entered into other areas of lending. Even in the lending business with 40 K crore only 11K crore is developer financing , remaining 20K crore is retail where the risk is relatively less.
CDPQ pension fund which is one of the share holder in Edelweiss , has invested 2K crore for a 15 - 18 % stake which values the credit business itself at 12K Crore. However the whole company is available at 8K
On the ARC , they are the largest in the country and its one of the highest profit making machine for them with ROA of 4-5 % and PAT of approx 400 Cr.
On Asset management they are big into AIF with Instutional / Pension fund / Insurance money as source of fund they not into retail Asset management.
On Wealth Mgmt they are the 3rd largest in the country with AUM of apprx 1.23 lakhs.
KORA invested in this business recently valuing them at approx 10K Crore.
On Insurance they are still in loss because Insurance have a long gestation period and they are on track to profitablity by 2022.
